Real estate investing traditionally focuses on a few well-known categories. Investors dealt with residential properties like single-family homes and apartments, as well as commercial properties such as office buildings, retail spaces or raw land. While fringe categories exist, the bulk of investors do not stray beyond tried-and-true methods.
Today, alternative real estate assets have proven capable of delivering strong returns. Consequently, investors have expanded portfolios to include properties such as data centers, senior housing, and mixed-use developments serving modern commercial and residential needs.
Self-storage is one niche asset class increasingly sought by real estate investors. Over-regulation and spikes in labor and wage costs have negatively affected margins in many other asset classes, but self-storage has remained untouched due to low personnel overhead and minimal regulatory and political scrutiny. It serves as a multi- faceted investment that benefits from dynamic pricing, a service/subscription model and data-driven strategies. This sector has consistently shown remarkable resilience through various economic cycles, making it valuable for those seeking to achieve reliable returns despite market volatility.
Appeal to investors
Heightened uncertainty and volatility across markets have inspired a shift in thinking among investors. Rather than focusing strictly on maximizing returns, savvy investors seek ways to maintain stability and safeguard capital. Resilient assets can withstand shocks caused by various economic scenarios, including inflationary pressures, interest rate fluctuations and economic contraction.
Several characteristics contribute to higher-than-average resilience in self-storage properties, with recession resistance as a primary factor. Recessions typically exert negative pressure on traditional real estate values, while hindering growth by raising financing hurdles for buyers. With self-storage, recessions generally create conditions that increase demand.
As homeowners and renters face increased financial stress and uncertainty during recessions, they may embrace downsizing to reduce financial demands. That increases demand for self-storage. Downsizing is one of “the four Ds” that generally trigger the need for self-storage, with the others being dislocation, divorce and death.
Homeowners and businesses experiencing growth can also leverage self-storage, especially as property values rise due to greater demand. Just as data centers have become popular with AI’s growth, storage has a direct correlation with housing and payroll inflation, providing an economical option for adding square footage to a household or business.
Minimal demands
Operational simplicity also renders self-storage a resilient investment. Self-storage facilities involve low maintenance requirements, minimal tenant improvement costs and streamlined management structures, allowing them to avoid many of the operational challenges common to other commercial real estate sectors.
“Recessions typically exert negative pressure on traditional real estate values, while hindering growth by raising financing hurdles for buyers. With self-storage, recessions generally create conditions that increase demand.”
Technology has also enabled self-storage to become largely automated, further simplifying its operations. Web and mobile platforms enable renters to explore facilities, reserve units, sign contracts, make payments and manage rental operations remotely. This eliminates the need for assistance from onsite staff.
Self-storage brings flexibility to fixed rent structures common with traditional real estate investing. In the residential sector, renters typically sign one-year leases that guarantee their monthly rent won’t increase. In commercial sectors, leases can often lock in rates for multiple years. Fixed rent structures help investors project future income, but when economic conditions lead to rising costs, can hurt investors by preventing them from making the changes needed to keep properties profitable.
With self-storage, rent structures are more flexible. Renters typically sign month-to-month leases, allowing furnishing operators the flexibility to adjust prices quickly in response to market conditions and inflation. Month-to-month leases also make it easier for operators to avoid long-term losses caused by delinquent tenants. Leases also follow state lien laws, as opposed to local and federal landlord-tenant laws, making eviction for non-payment streamlined and less disruptive in the customer’s life.
Continued growth ahead
Several ongoing demographic trends contribute to self-storage’s projected resilience as an asset class for real estate investors. E-commerce has expanded rapidly in recent years, rendering flexible storage solutions a necessity for small businesses, whether for storing inventory, packaging materials or shipping supplies. Self-storage provides a flexible, scalable, financially feasible solution for e-commerce businesses.
The aging baby boomer generation currently driving the highest rate of retirements in U.S. history also promises to increase demand for self-storage. As retirees transition from family homes to smaller residences, self-storage provides a space to keep important possessions during so-called “overflow times.” When care necessitates multi-generational living, self-storage offers extra space to store items temporarily.
The shift to remote work ushered in by the COVID-19 pandemic also increased self-storage needs. As workers converted bedrooms to offices, available “on-site” storage space decreased. Remote work created a storage need for companies that downsized office space in the wake of the pandemic without their needing to make long-term commitments to the new configuration.
A lack of occupancy can lead to heavy losses for real estate investors. To minimize the risk, investors typically seek ways to diversify their tenant base. From e-commerce operators to retirees to remote employees, recent trends support a diverse tenant base in markets around the U.S.
Self-storage properties, which often comprise hundreds of units, inherently provide the diversification necessary to generate stable rental cash flow. The properties also typically have a lower break-even occupancy rate compared to other multi-renter facilities.
Investment potential
As real estate investors eye future opportunities, compelling evidence supports adding self-storage to their portfolios. With some experts predicting a recession, investors should continue to focus on assets that perform well across economic cycles. During the Great Financial Crisis, self-storage was the only real estate sector to grow, solidifying the “recession-resistant” reputation of the asset class..
Self-storage also benefits from being a very data-intensive business. Advances in AI and data analytics provide the tools needed to maximize the value of that data, offering all the ingredients for continued momentum and resilience.
It’s also important to note that the pandemic, which created space challenges for both remote workers and families who were forced to set up schoolrooms in their homes, introduced self-storage to a brand-new audience. Facilities that continue to engage with those renters, educating them on the long-term value and convenience self-storage can provide, foster opportunities for ongoing growth.
As investors look for the best opportunities, the key is maintaining a disciplined approach to site selection and development. Facilities that are most likely to maintain high occupancy rates and drive revenue growth are those located in markets with strong population growth, areas with limited existing supply, and communities with strong household income metrics.
Significant shifts in the U.S. economy and culture have elevated the value of self-storage, creating new opportunities for real estate investors. Those who take advantage of the opportunities can expect to add a recession-resistant asset to their portfolio that leverages simplicity, accessibility and flexibility to drive growth.
